If the “opportunity zones” program was an obscure provision when it was slipped into the Tax Cuts and Jobs Act, it isn’t now. Investors, with the help of their tax attorneys, are busy this new year figuring out how to exploit the generous array of capital gains tax breaks afforded by more than 8,700 designated distressed zones across the country.
While the program promises windfalls to investors, there are no guarantees that it will bring sustained economic opportunity to low-income zone residents, the supposed beneficiaries. Policymakers argued that creating the tax break would spur economic growth in underdeveloped areas. But if history is any guide, the program could backfire and merely shift resources without creating additional benefits, as a new Tax Foundation study explains.
Opportunity zones allow investors to transfer any capital gain into a “qualified opportunity fund” within 180 days of that gain’s realization. Those funds then invest in qualified opportunity zone property. In return, investors can defer capital gains taxation on their investment until 2027. If they hold that investment for seven years up to 2027, they can exclude 15 percent of that gain from taxation. Additionally, any earnings from investments held for 10 years go untaxed. That means their incentive receives three separate tax benefits, a great deal if you can get it.
Aside from a few industries, such as liquor stores or gambling establishments, investors can claim these tax preferences on just about any investment that improves the value of the property, as long as it’s within an approved opportunity zone.
We’re already seeing how the program’s guardrails, or lack thereof, won’t prevent gaming beyond the program’s stated goal.
Take the Tampa Bay Rays. For much of the fall, the Major League Baseball team considered leaving its current home, Tropicana Field, and building a new $892 million stadium in Ybor City. The Rays ditched their plans, opting instead to reduce the size of their current stadium by 5,000 seats to create a more “intimate” experience for fans. But the team, which ranked last or second to last in attendance every year since 2011, considered Ybor City in part because it was an opportunity zone that would have allowed the team to take advantage of the program’s tax breaks.
Or you can look at Amazon’s new headquarters in Long Island City, N.Y., an area now designated as an opportunity zone. Now Amazon qualifies for the program’s valuable tax breaks, even though it chose the already-developing Long Island City regardless of incentives.
The value of opportunity zones to low-income residents, though, is less clear.
The capital and labor drawn by incentives could displace existing businesses and low-income workers by giving advantages to new competitors. An increase in land prices could also reduce the availability of affordable housing. Worst of all, it’s likely that the employment opportunities brought into zones won’t fit the skills of low-income residents in the zone. Instead of benefiting existing residents directly, employers will rely on workers from other areas.
In the end, we have to consider what we know about opportunity zones and what we don’t. Opportunity zones will draw investment. The program’s tax breaks are enticing. But place-based incentives have been around for decades, and there is quite a bit of evidence that they don’t work as advertised.
Going forward, policymakers should focus more on analyzing the true impact of this program and others like it. Otherwise, we’ll be funneling tax benefits to a program that doesn’t provide help to low-income residents as intended.
Scott Eastman is the federal research manager at the Tax Foundation.
